Facebook faces market reality

Facebook Inc., the world's most popular social network and anchor of the social media revolution, saw its share price plummet on Thursday after the company failed to show investors the meteoric revenue growth they were hoping for.

Combined with the dismal market performance of several new technology companies, including digital coupon service Groupon Inc. and social game-maker Zynga Inc., Facebook's uninspiring results serve to take the shine off an industry that, until recently, generated more investor hype than at any point since the dot-com bubble.

Despite 32-per-cent revenue growth, Facebook failed to impress shareholders, who drove the stock price down as much as 11 per cent during after-hours trading – after the company's shares had already dropped 8.5 per cent during the trading day.

Simply meeting earnings expectations is not enough for a company "that came with such hype and a $100-billion valuation," said Neal Bearse, associate director of marketing at Queen's University school of business. "The lack of a forecast for the future is what people are concerned about and potentially spooked by."

Investors didn't seem nearly as interested in Facebook's quarterly numbers as they did in the growth rates. Across the board, Facebook's revenue growth appeared too modest for investors, even as the company continues to post year-over-year increases. Given Facebook's unusually high price-to-earnings ratio, a lack of explosive growth likely scared some investors.

Facebook also offered little in the way of earnings forecasts in its announcement, which likely exacerbated the after-hours stock price slump.

Like its rival Google, Facebook makes most of its money off advertising. In that area, the company said it is experimenting with a number of new initiatives, including so-called "sponsored stories," which show up in users' timelines – the main part of the screen – rather than on the right side. Facebook is also investing heavily in mobile apps, including the pending purchase of photo app Instagram, as more and more Facebook users access the site from their phones. However the company doesn't seem to have plans to produce its own phone any time soon.

Instead, Facebook founder and CEO Mark Zuckerberg reiterated his vision of turning his company into a social platform for just about every Web site, app and service on the Internet.

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"We believe one of the biggest opportunities we have is to create the identity and social layers that all new apps and websites can be built on top of," he said. "We think almost every product is better when you can experience it with the people you care about."

Despite the obvious skittishness of investors, Facebook's executives said they are focused on steadily building up the company's ad offerings and addressing its inability to make money off mobile users. In the meantime, the company's stock price continues to take a beating, down about 30 per cent from its May IPO.

Michael Scissons, CEO of social media management firm Syncapse, said Facebook would do well to give investors a few quarters of consistent growth before pulling the trigger on a major announcement. "Investors are going to see sustained growth for the next little while," he said. "It's too early in the game to be driving 10-per-cent changes in the stock price."